Wednesday, October 08, 2008

Would Cheap Crude Really Be Good?

There’s been a lot of discussion about what will happen to crude prices in a recession or depression. One factor is that oil producing countries want a high floor under prices to fund their own social programs and domestic development. That’s why we hear talk of OPEC cutting production if oil gets cheaper. But they might well decide to cut prices and pump if they perceive that it’s necessary to jump start the world economy. So we have optimists saying that it’s great because we'll be back to $20 oil.

But that creates a monster problem that hardly anyone but Tom Whipple has seen. Developing oil fields now is much more expensive than in the days of yore. Especially offshore, renting a drilling rig costs hundreds of thousands of dollars a day, and lifting cost will be more expensive than that of onshore fields. If crude prices get much cheaper than now, many projects will have to be shelved because they’ll be money-losers. Crude production will then depend largely on fields that are already pumping. Because reserves and capacity are already slipping under current circumstances, cheap crude prices would greatly aggravate peak oil. Once expensive projects are abandoned, it would take enormous amounts of effort and money to start them up again later.

Compounding this problem is the global credit crunch, which makes it harder to fund energy projects. Further, keep in mind that although the financial meltdown is the trigger, the explosive growth in manufacturing, consumption, trade, and finance that built this mountain of money and debt was underpinned by decades of cheap, plentiful energy. So here you can see a feedback loop in which more expensive energy is limiting growth and money, while limited money is hampering energy development.

The bottom line, therefore, is that if crude gets too cheap, oil field development would suffer accordingly, so cheap oil would not be the savior that people hope for. In the long run, it would make peak oil even worse.